Tag Archives: investment advice

House Price Rises Give Birth to Generational Inequality

real estateMy Comments: I’ve spoken before about how uncomfortable I get with the increasing divide between the haves and the have nots. That it is real is evidenced by a TV show that features this very idea.

What I had not thought about before this was another disturbance in the force between generations. In my generation, as I married and began to have children, there was a progression that seemed normal that pushed my wife and I into larger and by extension, more expensive homes.

Mindful that we were lucky and between us were able to earn enough to make it happen, we still pushed the envelope when it came to what we could afford. Looking now at my daughter and her family as it grows, what her mother and I did 35 years ago seems very daunting.

They have a growing family and would like to move into a somewhat larger home located in a safer neighborhood. They have their present house up for sale but at nowhere near enough to allow them the freedom we enjoyed in the 1970’s. I suspect the economic crash we experienced in 2008-09 will resonate over time much as did the Great Depression in the 1930’s. It may be a new normal but not nearly as satisfying.

John Kay / December 9, 2014

Two weeks ago, I described two ways of looking at the capital of a modern economy: we can measure the value of physical assets or the total of household wealth. These aggregates are similar but not identical. The widely cited work of Thomas Piketty relates primarily to the value of physical assets.

The quality of available data on the value of physical assets, even in the modern era, is not very high. We have good information about current investment in various categories of assets — plant and machinery, vehicles, offices, shops and warehouses, roads and cables — but not about their current value.

National accounts figures for these assets are mainly estimated using a “perpetual inventory” method, in which allowances are made each year for depreciation, while new investments are added to the existing total. The resulting figure forms the basis of the next year’s calculation. Think of the solera process, where Spanish wine producers draw off a portion of mature sherry from a cask, before replacing it with each year’s new wine.

The calculations are sensitive to the assumptions made about depreciation and the price of capital goods. More fundamentally, it is never clear what one is trying to measure when one asks: “What is the value of the London Underground?”

But with these caveats we can look, as Professor Piketty did, at the long-term development of the physical assets of countries, such as Britain and France, which have a well-documented economic history.

Two centuries ago, agricultural estates were the principal components of capital, and hereditary ownership of such estates the principal determinant of wealth (and its inequality). But agriculture today represents a much diminished share of total output, and farm values in Britain and France were reduced by the opening of territories in North America and other parts of the world. Stately homes are today liabilities, not assets, and modern dukes make ends meet by serving tea to visitors.

These visitors are the new owners of capital. In both Britain and France, more than half of the value of physical assets is represented by residential property.

About 60-70 per cent of houses are owner-occupied, and they have a higher proportion by value. Even after deducting outstanding mortgages — about one-third of property values — owner-occupied housing is the largest component of personal wealth.

Accordingly, the main factor behind the phenomenon that “capital is back” is the increased value of urban land. This is a very different explanation from Prof Piketty’s claim that the growth of capital, and the inequality of its distribution, is driven by an ineluctable historical tendency for the rate of return on capital to exceed the underlying rate of economic growth (leading to indefinite capital accumulation by the wealthiest).

Property wealth comes in two forms: the return from occupying a house one owns, and steadily rising property values. Far from being accumulated, the return from owner-occupation is consumed on an annual basis through the act of living in a house. The rise in house prices, however, has a significant effect on the distribution of wealth; in particular, on the transmission of inequality between generations.

The ability of young people today to benefit from future house price appreciation depends in large part on their parents’ capacity to pass on the benefits of past house price appreciation to them. But that injustice is different in nature and cause from the inequality that concerns Occupy Wall Street, or the purchasers of Prof Piketty’s book.

The growth of housing equity and the value of pension rights have done a lot to distribute wealth more broadly. Their impact on inequality is less laudable.

A Tale of Two Markets

oil productionMy Comments: Yesterday the price of oil dropped below $50 per barrel for the first time in a long time. The stock market dropped.

In earlier posts about the price of oil, I suggested there was good news and bad news associated with the drop in the price of gas at the pump. Now that the holidays are over and many of us are back to normal again, the threat of a global economic decline as the cause of lower oil prices is taking hold. Brace yourself.

Scott Minerd / December 17, 2014

As seasoned investors are well aware, financial markets and economic trends seldom move in straight lines. Nowhere was this old adage more evident than in the discrepancy between last week’s domestic economic data releases and the performance of the stock market. Although U.S. equities suffered their biggest one-week drop since May 2012 on the back of declining oil prices, American consumer confidence reached new post-recession highs, with retail spending for the month of November comfortably beating expectations.

While the U.S. economic expansion continues to power forward, the international situation is becoming increasingly grim. The recent decline in the ruble, which Russia attempted to slow with a surprise rate hike of 6.5 percentage points to 17 percent, is reminiscent of the early stages of the 1998 Russian crisis. Elsewhere, the European Central Bank has fallen behind the curve, Abenomics in Japan is stalling, and China is making the painful adjustment to slower growth. Nevertheless, while international events are likely to get worse and energy prices are likely headed lower, I don’t envision a larger economic malaise spreading to the United States in the near term.

Understandably, investors are currently spending the majority of their time worrying about oil and where the price bottom is. The United Arab Emirates’ energy minister announced over the weekend that OPEC is standing behind its Nov. 27 decision not to cut the group’s collective output target of 30 million barrels per day, which highlights the blatant lack of pricing discipline within the organization. As oil continues its decline, pressure is increasingly mounting on credit markets, especially high-yield corporate bonds, where energy-related borrowers represent 15-20 percent of the market.

The flip side is that as spreads widen, we get closer to the levels where large investors, such as pension funds and insurance companies, start to see value in the high-yield market, which should help stabilize credit spreads. Ultimately, what investors should prepare for is an extended period of depressed oil prices. Oil still has substantial downside room to run before reaching a level of stability. Once stabilized, depressed oil prices will create another “tale of two markets” — companies with oil exposure and those without.

Happy New Year! A Grand Illusion?

I apologize for being philosophical and rambling on, but I am prone to do that as my years accumulate and future years become less certain.

Today is January 1, 2015. It’s important for us to recognize this day, the first day of the calendar year. It is significant in human terms, celebrated across the civilized world as proof the old year is gone and a new one is beginning. In this context, it represents the start of a new term, a span of life that holds promise along with likely disappointment.

On another level, it is such a short span as to be essentially irrelevant, so indistinguishable from other time spans as to be almost an illusion. Is it real or is it just our imagination?

Astronomy and the cosmos have long fascinated me. Not as a scientist with expertise and authority, but as an observer and someone who chooses to spend some of that time referenced earlier thinking about the implications. Questions about why I am alive today, as opposed to millennia ago or at some point in the millennia to come. And in the grand scheme of things, how significant is a ‘millennia’ anyway.

On a certain web site I follow, articles about astronomy and the cosmos by a Phil Plait appear from time to time. Here is a link to what triggered my thoughts today: The Beauty of a Grain of Sand on a Cosmic Beach.

The writer includes this image of a distant galaxy, similar in size and shape to our own milky way galaxy. He says it is roughly 85 million light years away, has about a billion stars with probably an equal number of planets. He reflects that it is not unusual in any way, has been written about in astronomical literature only once that he can find, and suggests it is but another grain of sand on a cosmic beach.

If you’ve ever been to a sandy beach, or walked on sand dunes somewhere on this planet of ours, you know the immensity suggested by trying to identify a single grain of sand, much less grains of sand that might exist on other planets, spinning around an unknown sun, one of mega-billions that exist across the cosmos among billions of galaxies.

I’m very aware that shortly after I woke up this morning, I climbed out of bed, went to the bathroom, brushed my teeth, got dressed and went for a walk. Something I do almost every morning. I was aware that it was January 1st, that I had gone to sleep before the magic moment arrived when the calendar shifted from 2014 to 2015. As I write this a couple of hours later, it all seems very real.

Until I start thinking about that image of a galaxy identified as NGC 1169. And on that level, my getting up and going for a walk, fixing a cup of coffee and reading the paper seems illusory. Did it really happen? Does it really matter? Why am I having these thoughts? Are thoughts like this real, or are they the figment of someone else’s mind? Are there life forms somewhere across those trillions of planets thinking about the same things we think about? For me that seems to be very likely. So on this level, what I seem to get done today, indeed this year, is essentially irrelevant.

But on our level, that is you and me, as two of several billion functioning human beings on what we call planet Earth, what we do this year is important. Knowing that existence for us can exist on different levels helps me eliminate the notion that what I do today is not an illusion, that it does matter. So I have some goals that I will try to achieve this calendar year.

And in the spirit of our existence as functioning humans on this spinning pile of rock somewhere in the cosmos, Happy New Year!

A Terrific Message…

Those of you who know me well know I am not very spiritually inclined. However, I am inclinded toward elegant ideas, artfully expressed. This message comes from a speaker at Abiline Christian University. I enjoyed it. You might also.

The Next Great Market Meltdown

My Comments: My hope for the future about this is that I will be wrong. But I’m also aware that hope is not a very effective investment strategy. So, apart from my hope that you and yours have a spectacular 2015, it’s tempered by my expectations of reality. This writer is well known to those of us in this business.

This chart appeared in April of 2013. Meanwhile the market has now exceeded 18,000! What do you think is likely to happen next? I suggest you be prepared.

by Bob Veres / DEC 17, 2014

Ever since Congress and regulators failed to fix the sales incentives that drove us to the epic global meltdown of 2008, I’ve been watching for the next debacle — and I think it’s finally coming into view.

If I’m right, we’re approaching a confluence of failures that will feed on each other. The next great debacle will end up tarnishing (yet again) Wall Street’s reputation. But this time I’m afraid it will also stain the good name of financial planners and advisors.

Let’s start with nontraded REITs, which seem to be imploding right before our eyes. I warned anybody who would listen about recommending opaque illiquid products that use investor dollars to pay huge commissions and generous due diligence fees to broker-dealers.

How could anybody believe that this toxic combination adds up to a viable investment? Unless, of course, the promoter is stuffing money in your shirt pocket.

Now broker-dealers, custodians and investors have all started to back away from the sector; I suspect the stench has become so awful that they have, somewhat belatedly, gotten cautious about taking on the liability associated with selling at least some of this junk.

They may be remembering a lesson we all learned in the last go-around with investments like these, during the tax shelter era. The general partner business model for illiquid investments is only sustainable if ever-greater amounts of money are being raised. Once the sales dry up, the sponsors pack their bags and move on to the next opportunity — or retire in luxury with millions of dollars sucked right out of the accounts of workers and retirees.

If I’m right, the next great debacle will see thousands of customers — who put their trust in people who call themselves financial planners and investment advisors — discover that they can no longer afford retirement. The lawsuits over billions of lost investor dollars will, once again, test the viability of the independent broker-dealer industry. Headlines will paint the entire financial planning profession as a bunch of greedy sales agents.


Nontraded REITs are sold as a high-yield investment in a yield-starved marketplace. Using essentially the same pitch, a growing number of reps are also selling load-bearing fixed-income mutual funds that offer impressively higher yields than their peers.

Their secret? Load up on the diciest (unrated) private bond issues, BBB-rated or lower investments and higher-duration bonds that are going to get creamed when interest rates tick up.

The Fed has kept rates so low for so long that thousands of questionable issuers have been able to float bonds and rake in money at above-market rates that are low by historical standards. Since the Lehman Brothers collapse, aggregate corporate bond debt has increased an astonishing 53%, according to Bank of America-Merrill Lynch research, with three straight record $3 trillion years of new paper issued.

And emerging market countries set a record for debt issuance last year, at more than three times 2006 levels, according to Thomson Reuters. Kenya issued the largest sovereign bond issue ever by an African nation, equivalent to about a third of its total tax revenues — and the offering was four times oversubscribed.

This is looking like a bond bubble of epic proportions, as the potential default of some Puerto Rican bonds — a prominent holding of many of these yield-chasing funds — is starting to make clear. Any reasonable due diligence effort would question whether Puerto Rico will ever be able to pay back outstanding municipal debt that equals $18,919 per resident of that impoverished island.

Yet last year, an article in The Bond Buyer noted that a Franklin Templeton fund had amassed an astonishing 61% weighting in Puerto Rican debt, while a number of Oppenheimer funds were more than 20% invested in Puerto Rican bonds.

It’s not hard to predict that, early in the next great debacle, interest rates will tick up just enough that nobody on the secondary market is going to want to buy dicy paper when they can get equivalent yields from new-issue Treasuries. At current rates, even small shifts could cause risky bond values to fall hard enough to startle lay investors.

Millions of people could see losses on their quarterly statements in a part of a portfolio that their sales rep, masquerading as a financial planner, told them was rock-solid stable — and many of them are going to want to redeem their shares. A run-on-the-bank phenomenon would make the liquidity problem much, much worse.

Imagine the panic reaction if word gets out that certain funds are unable to liquidate and give investors their money back.

I’m going to go out on a limb and predict that at least some of these funds will decide to calculate their NAV using optimistic valuations for bonds that nobody wants at any price. When the regulators step in and demand a repricing, and investors see dramatically higher losses than were being reported, the whole downward spiral will go around one more turn.

In a related scandal, policyholders might discover that the universal life contracts they were sold are nowhere near performing as they were projected when these sales reps sold them the policies. As insurance companies demand new premium payments to keep the policies in force, and investors complain about double-digit losses in their bond funds, the media will have yet another reason to question the value of a financial planning engagement.

Somewhere in this mess, I expect another big shoe to drop. Does anybody want to bet that the wirehouses are not selling trillions of dollars worth of undisclosed, unregulated derivatives contracts that allow companies and banks to hedge against higher interest rates?

If rates jump faster than their models predict, I can envision Wall Street firms being on the hook for more than their aggregate net capital holdings — and, given the size of the derivatives market, the liability might actually be comparable to gross global GDP.

I wouldn’t be surprised if, as the next great debacle unfolds, we were to discover that the brokerage firms had also been quietly selling packaged combinations of privately issued bonds to their institutional and highly leveraged hedge fund customers — junk disguised as high-quality paper.

Welcome to the next government bailout.

I hope none of this comes to pass; I really do. But I think the next great debacle that I’ve outlined here is a grimly logical consequence of all the sales incentives that still govern so much of the financial services marketplace. It’s a shadowy world where what you make is infinitely more important than what the customer makes.

Unless those incentives are fixed — and unless the public is given a fair chance to know who is and who is not motivated to sell them junk investments — we’re going to see this same unhappy scenario play out over and over again. The particular investments and shady scams may change from debacle to debacle, but the underlying driver remains the same.

As the next great debacle unfolds, I would ask that both regulators and journalists pay close attention to the fact that those who could trigger this multiheaded scandal — ruining millions of financial lives with self-serving recommendations — were allowed to call themselves financial planners and financial advisors. But that doesn’t mean that they actually were.

Bob Veres, a Financial Planning columnist in San Diego, is publisher of Inside Information, an information service for financial advisors. Follow him on Twitter at @BobVeres.

2015 PPACA Compliance Checklist

My Comments: It’s hard to believe the PPACA (ObamaCare) has been around for so long. And in spite of the new Congress making lots of noises about making it go away, it’s not going to go away.

Will it change? Most definitely. Are changes necessary? Most definitely. But the overall intent to bring millions of Americans into the health insurance pool will not go away. It’s in everyone’s best interest that we be a healthier and more productive society going forward.

The vast majority of small businesses in this country are businesses with fewer than 100 employers. But that still leaves millions of people employed in larger businesses. Over the years I’ve not had any clients of the “larger” size, but many large enough to have employee health plans. If you don’t now have a health plan for your employees, this may be helpful.

By Juliette Meunier / December 8, 2014

More Patient Protection and Affordable Care Act group health provisions are supposed to begin taking effect in 2015.

The current schedule calls for a transitional version of the PPACA “play or pay” employer coverage mandate to apply to employers with 100 or more full-time employers, and to some employers with 50 to 99 employees.

Employers will have to keep track of which employees were offered health coverage in any given month, and large employers will have to put the employee count data they collected in 2014 into Internal Revenue Code Section 4980H “employer shared responsibility” reports.

Meanwhile, some of your employee clients may still be scrambling to create, and understand, their PPACA compliance checklists. What should those clients be doing to make sure they’re ready for 2015? Here are five action items to think about.

1. Review existing measurement systems.
Are your clients equipped to determine employee status, while considering measurement and stability periods, to provide coverage as soon as an employee becomes eligible?

2. Determine excise tax penalty risk by entity.
Your clients should identify potential full-time employees not offered coverage.

3. Assess reporting systems.
Are your clients’ reporting systems capable of gathering and aggregating the required information for IRS reporting – by employee, on a by-month and by-entity basis? Reports are due to the IRS in 2016, but data collections begins January 1, 2015. How do companies manage data residing in multiple locations? This is especially difficult for employers with a contingent or variable workforce.

4. Prepare for marketplace/exchange notices.
In November, open enrollment begins and even businesses offering affordable care to employees are likely to receive Marketplace notices. Notices must be analyzed for accuracy and any erroneously issued notices must be appealed within the designated timeframe – which can vary by state (typically 90 days).

5. Develop a plan for IRS assessments.
Will your clients be able to provide supporting analysis and documentation to defend against erroneous assessments?

Why the Bond Market Could Blow Up Any Day Now…

My Comments: The SKY IS FALLING! Actually, it’s not, but many of the headlines suggest it might be. This was published 3 months ago and as you probably know, the bond market has not yet blown up. Lots of things have changed but the bond market is just as boring today as it was then.

Just don’t begin to think it will NEVER BLOW UP. It will change, and you should hope that the change will be gradual. That gives all of us a chance to adjust and become adapted to a different world. Unfortunately, that’s not always how the markets work. Just remember, there are ways to profit from all this, and I can help you, but not with many guarantees.

Brad Johnson, 19SEP14

Since the recession, $900 billion has poured into the bond market because bonds were viewed as a safe place to put money.

But after multiple years of the Fed’s low-interest rate policies, it looks like there is only one direction for bonds to go…


Bonds lose value as interest rates rise.

You already know this… but most consumers don’t.

Already, the Fed is talking about raising interest rates in spring of 2015. Of course, news of an increase will be priced in long before rates actually rise.

What’s the actual impact of rising rates on the bond market?

Just look at the PIMCO Total Return Fund. It’s the largest bond fund in the world.

From May 1st to June 24th (2014), interest rates went up about 1%. At the same time, the Total Return Fund decreased by around 6%.

If a 1% increase in interest rates causes a 6% decline in the value of bonds, what would happen if interest rates went up 2%… 3%… or more?

Keep in mind, this is not a linear progression. At some point panic sets in and the bond market collapses as investors run for the doors. Bloomberg Businessweek reports:

“Wall Street firms are warning clients that if fund investors who view bonds as safe are hit with sudden losses, there could be something akin to a run on the bond market.

“The worry isn’t only that investors’ bottom lines would take a hit. It’s that a mass selloff could swamp the market, with demands for redemptions forcing fund managers to unload their bonds at rock-bottom prices. The ensuing losses would encourage even more investors to redeem, perpetuating the downward spiral.”